
Business-entity - A business should be a separate entity from the owner of a business


Personal items
Records and transactions


Continuing-concern concept – the business will continue to operate.

Allows assets to be recorded at cost
 Remain at that figure no matter what the market value may be
 If sold, the assets of the company will be valued at market value to determine selling price


Time-period concept – divides the business into equal periods of time,
 ie month, quarter or year


Cost principle – assets are carried at cost on the financial statements


Cost is what was paid for the asset
An item from your home - used value


Matching principle – earnings and expenses are recorded in the period when one benefits the other
 ie September expenses are recorded in the same period as September revenue


Consistency Principle – Methods and procedures are kept the same over time.


Allows for better comparison of data
If changed, change and effect must be reported on Financial Statements

Adjusting Entries – Unpaid and/or unrecorded transactions at the end of the accounting period.

Balance Sheet - A “snapshot” of the business’
Assets, Liabilities and Owner’s Equity on a specific date.

Closing Entries – entries made to close (zero out) all temporary accounts at the end of the accounting period .

Income Statement - profit or loss of a business
• Earnings less expenses
• reflects a period of time (usually one month)

Journal – the book of original entry all transactions are recorded here first

Transactions – business papers and source documents that change the financial position of a business

Book of
Original
Entry

Step 1 Business
Transactions occur

Source
Documents
(receipts, invoices, tapes, checks and memorandums)

Book of
Original
Entry

Step 2 Analyze and Record the
Transactions

Information is placed in the
Journal by date of occurance

Book of
Original
Entry

Step 5 Journalize
Adjusting Entries



No source documents
End of fiscal period
To match revenue with expenses in that period

Book of
Original
Entry

Step 6 Post
Adjustment from Journal to
Ledger

General Leger only

Book of
Original
Entry

Step 7 Prepare
Adjusted Trial
Balance

To determine if an error in posting has occurred before
Financial
Statements are prepared

Book of
Original
Entry

Step 8
Journalize
Closing Entries

Close all temporary
( NOMINAL) accounts
 Revenue


Expenses
Drawing

Book of
Original
Entry

Step 9 Post
Closing Entries from the Journal to the Ledger

General Ledger only

Book of
Original
Entry

Step 10 Post
Closing Trial
Balance

Permanent accounts only

Book of
Original
Entry

Step 11
Prepare the
Financial
Statements

Basic Statements
 Income Statement
 Balance Sheet

Permanent Accounts
Assets
Liabilities
Capital
Temporary Accounts
Revenue
Expenses
Drawing


Record Revenue (earnings) and expenses

Cash basis
 Cash in Cash out

Accrual basis



Record Revenue & Expenses when earned/incurred
Cash is not the same as revenue
Matching principle


1 st question asked:


Cash
Accrual

Other



Small businesses

Simple to understand



Record cash only when received
Record expenses when cash is paid or check is issued
Record credit card charges when signed for
Combination

Income and expense clearly shown


Consistently
Can not switch between the two


Always use when merchandise is a factor
 Production


Purchase
Sale



More difficult to understand
Timing of revenue and expenses
Nothing to do with payments or receipts

All Revenue Only Cash
Not Paid